Where do investors tend to put their money in a bear market?

Investing, Asset Allocation
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September 2017
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A bear market can happen in stocks, bonds, or commodities, and of course, it is never announced in advance.  In any case, if you think one is coming, you have to define how large of a valuation drop constitutes a bear market (many opinions on this), and how long the bear will stay around.

Deciding to defend against a bear market can be complicated if your invested assets are in a taxable account. Uncle Sam will want a piece of your realized gains if you sell investments and go to cash, the piece he takes depends on whether the gains are long-term or short-term, and what your marginal tax rate will be.  

The most direct answer would be, investors move some money to cash, not so much to defend, but to create the ability to be opportunistic, and this move is ideally made prior to a market being defined as a "bear market" by the press. I say defend, because most "investors" remain mostly invested for the long-term, because constantly jumping in and out of the market is often ineffective and expensive from the standpoint of opportunity cost, transaction cost, and tax cost.

Long-term investors would seek to offset some of the general market risk by adjusting allocation to less at-risk sectors of the specific market they are invested in. e.g. favoring government bonds over corporate bonds, short term maturities over long term maturities, value stocks over growth stocks, underweighting and/or overweighting specific sectors, etc., etc.

If you are a long-term investor, and can lose less when the markets retreat, and stay with the market when markets advance, typically you win the game.

Hope this helps,


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